PROJECTS

Why invest in property?

Leverage is simply utilising debt to finance the acquisition of an asset. In property, one can use leverage not only as a means of increasing the return on equity invested through obtaining a mortgage. This is something that cannot be done with investing in other asset classes e.g. trading stocks and shares or investing money in savings accounts and relying on bank interest. Leverage enables investors investing less money to generate a greater return on investment (ROI).

They say property doubles in value every ten years. This isn’t necessarily true in all circumstances but property has certainly seen a rise for the last 5-10 years. According to home.co.uk, property prices in Yorkshire have risen by 21% on average in the last 5 years. So a landlord’s property which initially cost £200,000 in 2012 would now be worth circa £242,000. With a monthly rental income on top of this, it certainly acts as a perpetual advantage to investing in property.

Following on from leverage, one facility available to property investors is the ability to ‘gear’ your portfolio. To explain, this is where one may have £100,000 available and one option is to invest all this money in one property worth £100,000. Alternatively, through gearing, the same £100,000 could be utilised to buy 4 properties at £25,000 each with 4 buy to let mortgages. Please note, this explanation should be used as a rough example only and does not account for stamp duty land tax and conveyancing fees etc.

With the above example in mind, if property prices increase in that area in a year by 25%, should the investor had bought one property for £100,000, his/her property portfolio would now be worth £125,000. However had the investor used the same equity and invested in four properties their portfolio would now be worth £500,000 (4 x £125,000). Therefore there are great returns to be had in multiple property investment.

To date, interest rates are incredibly low and the Bank of England base rate currently sits at 0.25% with more competition in the buy-to-let lenders market than ever, as people vye for a piece of the pie. With servicing mortgage debt being so low, this acts as a great opportunity for landlords to re-finance their portfolio, purchase additional properties and obtain a greater return.

Over stocks and shares and other forms of investment, from experience, there is something quite comforting about having an asset that you can touch and feel over something electronic. You know where your property is and know it won’t go anywhere!

There are plenty of opportunities to add value whether it is a refurb project or a lease extension, which are not available in other asset classes. Again using a rough example, you may be able to buy a property which requires work doing, and increase its value once the works is done. You may struggle to purchase other investments at a reduced price, make them better and resell them for a higher price.